It's Not Just a Movie —
The "Dirty Dozen" Also Involves
Fraudulent Schemes

Getting involved in fraudulent tax schemes can lead to hefty fines — or even jail time. Here's a list of the latest IRS "Dirty Dozen" tax schemes currently making the rounds. Some are new, and some you may recognize from the IRS' annual list in previous years:

1.Zero
Wages

"When it comes to taxes, everyone has to pay their fair share,” IRS Commissioner Mark W. Everson said. “I urge taxpayers not to be taken in by hucksters who promise to lower or eliminate taxes. Getting caught up in the Dirty Dozen or similar schemes can lead to big headaches.”

— IRS Commissioner Mark Everson

This scam is new to the Dirty Dozen this year. It involves individuals attaching either a Form 4852 (Substitute W-2) or a corrected Form 1099 to their tax returns. These forms show zero or little wages and are accompanied by statements from the individuals saying they dispute information submitted to the IRS by payers.

An explanation on the Form 4852 may cite "statutory language behind IRC 3401 and 3121" or include some reference to the paying company refusing to issue a corrected Form W-2 for fear of IRS retaliation. The Form 4852 or 1099 is usually attached to a "Zero Return," described in number four below.

2. Form 843
Tax Abatement

This scam is derived from a misinterpretation of the Internal Revenue Code. Participants file IRS Form 843, requesting abatement of previously assessed tax. Many people using this scheme have not filed tax returns, but have been assessed taxes by the IRS through the use of the "Substitute for Return Program." Form 843 is used to list reasons for the request. One common reason cited by these filers, according to the IRS, is: "Failed to properly compute and/or calculate IRC Sec 83–Property Transferred in Connection with Performance of Service."

3. Phishing

This favorite ploy of Internet identity thieves is used to cull personal financial data from unsuspecting consumers. Sometimes, scammers pose as IRS agents or representatives and send out fictitious e-mails that appear to be from the tax agency. The messages may inform recipients that they have refunds pending, but the money cannot be released until the taxpayer fills out a special form providing confidential financial information. Other messages may tell taxpayers they are being audited by the IRS but they can fix the problem by clicking on the link and entering sensitive data such as Social Security Numbers and credit card information. Phishers go to great lengths to make e-mails and corresponding Web sites appear genuine in hopes of gaining the confidence of recipients.

The IRS wants the public to know that it does not use e-mail to initiate contact with taxpayers about issues related to their accounts. If taxpayers have any doubt whether a contact from the IRS is authentic, they can call 1-800-829-1040 to confirm it.

4. Zero
Return

Promoters advise taxpayers to enter all zeros on their income tax returns. They do report withholding, and then write on the return “nunc pro tunc” which is Latin for “now for then.” They often do this on amended returns in the hope the IRS will disregard the original returns on which they reported wages and other income.

5. Trust
Misuse

Illegal trusts are an old-timer on the list of tax schemes. Promoters convince taxpayers to transfer assets into trusts, thereby reducing taxable income, creating deductible personal expenses, and limiting estate or gift taxes. However, some of these trusts don't deliver the promised tax benefits and the IRS is aggressively examining these arrangements. More than 200 active investigations are in progress, and three dozen injunctions have been obtained against promoters of these trusts since 2001. As with any arrangement, taxpayers should consult their professional tax advisers before entering into a trust to ensure it is legitimate.

6. Frivolous
Arguments

You may recognize some of the outlandish claims that promoters have been making for years: The Sixteenth Amendment concerning congressional power to lay and collect income taxes was never ratified; wages are not income; filing a return and paying taxes are voluntary; and a requirement to file Form 1040 violates the Fifth Amendment right against self-incrimination or the Fourth Amendment right to privacy. Don’t believe these or other similar claims. In spite of the insistence of the promoters who sell these ideas, the arguments are false and have consistently been thrown out of court. Although taxpayers do have the right to contest their tax liabilities in court, no one has the right to disregard the law.

7. Return
Preparer
Fraud

"Dishonest return preparers can cause many headaches for taxpayers who fall victim to their schemes," the IRS warns. Such preparers derive financial gain by skimming a portion of their clients’ refunds and charging inflated fees for return preparation services. They attract new clients by promising large refunds before they ever see their information.

As the old saying goes, “If it sounds too good to be true, it probably is.” And remember, no matter who prepares a return, the taxpayer is ultimately responsible for its accuracy.

8. Credit
Counseling
Agencies

Taxpayers should check carefully before becoming involved with credit counseling organizations promising to fix credit ratings, and those

pushing debt payment plans or imposing high fees that add to existing debt. Negative information that is accurate cannot be erased from a credit report, regardless of claims to the contrary. While there are reputable credit counseling agencies that help consumers, some only make credit problems worse, adding to existing debt by charging fees for unnecessary services. That is why the IRS Tax Exempt and Government Entities Division is in the process of revoking the tax-exempt status of numerous credit counseling organizations that falsely claim to educate and assist financially distressed consumers.

9. Abuse of Charitable
Organizations
and Deductions

The IRS reports an increase in the use of tax-exempt organizations as a way to improperly shield income or assets from taxation. This can happen when a taxpayer transfers assets to a tax-exempt supporting organization or a donor-advised fund, without turning over control of the assets or income. The taxpayer then takes a tax deduction for the contribution, although he or she hasn't provided a legitimate benefit to the charity.
An IRS example: A taxpayer may “contribute” a historic facade easement to a tax-exempt conservation organization. In many cases, local historic preservation laws already prohibit alteration of the home’s facade, making the contributed easement superfluous. Even if the facade could be altered, the deduction claimed for the easement contribution may far exceed the easement’s impact on the value of the property.

10. Offshore
Transactions

Individual taxpayers continue to try to avoid U.S. taxes by illegally hiding income in offshore banks and brokerage accounts, or by using offshore credit cards, wire transfers, foreign trusts, employee leasing schemes, private annuities, or life insurance.

But the IRS and state tax agencies have cracked down on such activities and continue to agressively pursue those who promote and participate in these abusive transactions. During fiscal 2005, 68 individuals were convicted on charges of promotion and use of such abusive tax schemes designed to evade taxes.

11. Employment
Tax Evasion

The IRS has seen a number of illegal scams that instruct employers they do not need to withhold federal income tax or other employment taxes from employee wages. This advice is based on a misinterpretation of Section 861 and other parts of the tax law and has been refuted in court. On a related issue, the IRS has also seen a rise in what it calls “double-dip” parking and medical reimbursement issues.

Note: Employer participants in these schemes can be held responsible for back payments of employment taxes, plus penalties and interest. And keep in mind that employees who have nothing withheld from their wages are still responsible for payment of personal taxes.

12. "No Gain"
Deduction

With the "no gain" deduction, filers try to eliminate their entire adjusted gross income (AGI) by deducting it on Schedule A. The taxpayer lists his or her AGI as an “Other Miscellaneous Deduction” on Schedule A, and attaches a statement to the return that refers to court documents and includes the words "No Gain Realized."

How to Report Suspected Tax Fraud Activity

Suspected tax fraud can be reported on IRS Form 3949-A, Information Referral. This form is available on the IRS Web site at IRS.gov, or you call 1-800-829-3676 and ask the IRS to mail it to you. The completed form or a letter detailing the alleged fraudulent activity should be addressed to the IRS, Fresno, CA 93888. Include specific information about who is being reported, the activity, how it became known, when the alleged violation took place, the amount of money involved, and any other information that might be helpful in an investigation. People filing the reports are not required to identify themselves, although it is helpful to do so. They may also be entitled to rewards.